Vijaya Diagnostic Centre (NSE:VIJAYA) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Vijaya Diagnostic Centre Limited (NSE:VIJAYA) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Vijaya Diagnostic Centre

What Is Vijaya Diagnostic Centre's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Vijaya Diagnostic Centre had debt of ₹2.59b, up from ₹2.48b in one year. On the flip side, it has ₹1.82b in cash leading to net debt of about ₹769.7m.

How Healthy Is Vijaya Diagnostic Centre's Balance Sheet?

According to the last reported balance sheet, Vijaya Diagnostic Centre had liabilities of ₹728.7m due within 12 months, and liabilities of ₹2.50b due beyond 12 months. On the other hand, it had cash of ₹1.82b and ₹187.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.22b.

This state of affairs indicates that Vijaya Diagnostic Centre's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹98.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Vijaya Diagnostic Centre has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With net debt sitting at just 0.33 times EBITDA, Vijaya Diagnostic Centre is arguably pretty conservatively geared. And this view is supported by the solid interest coverage, with EBIT coming in at 7.1 times the interest expense over the last year. On top of that, Vijaya Diagnostic Centre grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Vijaya Diagnostic Centre's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Vijaya Diagnostic Centre recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

The good news is that Vijaya Diagnostic Centre's demonstrated ability to grow its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its net debt to EBITDA also supports that impression! It's also worth noting that Vijaya Diagnostic Centre is in the Healthcare industry, which is often considered to be quite defensive. Looking at the bigger picture, we think Vijaya Diagnostic Centre's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. Over time, share prices tend to follow earnings per share, so if you're interested in Vijaya Diagnostic Centre, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.